During bull markets, funds that short stocks can struggle to keep up with long-only brethren. Hedge funds are getting their own back this year, shorting UK-listed fund managers such as Abrdn and Ashmore.
In both cases, short positions relative to outstanding shares have jumped towards two-year highs, according to data from Markit. The income that asset managers receive from fixed fees falls in parallel with the value of portfolios. That makes fund groups obvious targets for hedge funds that expect securities markets to fall further.
For Abrdn, analysts expect a 6 per cent decline this year. It is likely to be triple that rate for Ashmore in the year to June 2023.
Abrdn has deeper, structural problems. Bonus payments usually account for about half of asset managers’ costs, says Numis. Such variable pay counters the vagaries of markets. By contrast, Abrdn’s fixed costs are easily above 80 per cent.
Newish chief executive Stephen Bird wants to fix this by focusing more on wealth management. Last year he bought retail specialist Interactive Investor for £1.5bn to capture the DIY end of this market. However, hedge funds are also shorting sector leader Hargreaves Lansdown.
Ashmore offers a wager on falling emerging markets securities. It has a record of buying bonds in out-of-favour countries such as Argentina, Ukraine and Lebanon. A soaring US dollar has pummeled these contrarian bets.
Shares of both Abrdn and Ashmore are sensitive to movements in their home index, measured as beta. Over five years Abrdn’s share price volatility has been 1.6 times that of the FTSE All-Share index, and Ashmore’s 1.4 times. That compares with 1.1 times for Schroders. That may reflect a higher domestic orientation at Schroders.
Short positions can have unlimited loss potential. As leveraged proxies for market movements, shorts on listed fund managers make some sense. But focusing on those with structural problems such as Abrdn offers less risk.